Archive for the ‘Wal-Mart’ Category

FCPA-Related Securities Fraud Claims Against Avon And Former Executives Dismissed … Securities Fraud Claims Against Wal-Mart And Former CEO Go Forward

Thursday, October 2nd, 2014

As highlighted in “Foreign Corrupt Practices Act Ripples,” although courts have held that the FCPA does not provide a private right of action, plaintiffs’ lawyers representing shareholders often target directors and executive officers of companies subject to FCPA scrutiny with civil suits alleging, among other things, breach of fiduciary duty or securities fraud.

Such claims often follow a predictable pattern. In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, purported investigations are launched by plaintiffs’ firms representing shareholders and lawsuits often begin to rain down on the company, its board of directors or executive officers.

Even though such claims rarely survive the motion to dismiss stage, opportunistic plaintiffs’ counsel continue to bring such claims in what is viewed by many as a parasitic attempt to feed off of FCPA scrutiny and enforcement.

The securities fraud lawsuit against Avon Products and Andrea Jung (former Chief Executive Officer) and Charles Cramb (former Chief Financial Strategy Officer) was less worse than a typical suit, yet nevertheless suffered a similar fate.

Earlier this week, Judge Paul Gardephe (S.D.N.Y.) dismissed the claims.

The putative class action was brought on behalf of purchasers of Avon’s stock between July 2006 and October 2011 and the complaint alleged that Avon, Jung and Cramb issued materially false and misleading statements concerning Avon’s compliance with the FCPA in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

The factual portion of the opinion no doubt foreshadows the likely facts to be alleged in Avon’s upcoming FCPA enforcement action – namely that Avon allegedly made improper payments in connection to obtain Chinese government approval to engage in direct selling.

The plaintiffs alleged a variety of false and misleading statements.

As to general statements in Avon’s ethics codes and corporate responsibility reports, the court ruled (consistent with prior courts) that general statements proclaiming compliance with ethical and legal standards are not material and thus not actionable.  In the words of the court:

“[A] reasonable investor would not rely on the statements … as a guarantee that Avon would, in fact, maintain a heightened standard of legal and ethical compliance.  The … statements from the Ethics Codes and the Corporate Responsibility Reports offer no assurance that Avon’s compliance efforts will be successful, and do not suggest that Avon’s compliance systems give the Company a competitive advantage over other companies.  Instead, these statements merely set forth standards in generalized terms that Avon hoped its employees would adhere to.  Such statements are not material.”

The court did conclude that other statements in Avon’s Corporate Responsibility Report addressing concrete steps that Avon has taken to ensure the integrity of its financial reporting were material, but nevertheless dismissed claims relating to those statements on other grounds such as lack of scienter.

Plaintiffs also alleged that a variety of statements concerning Avon’s business success were false and misleading “because they did not attribute Avon’s success to the bribery of foreign officials or disclose the significant risk that, once the full extent of Avon’s illegal practices become known, the Company would be exposed to criminal and regulatory investigations, significant damage to reputation, and other losses and costs.”

As to these various statements, the court concluded that such statements could be construed as misleading – and thus actionable – but nevertheless concluded that the plaintiffs failed to plead facts sufficient to give rise to a strong inference that the defendants acted with scienter in making such statements.

In pertinent part, the court concluded that “generalized allegations founded solely on an individuals’ corporate position are not sufficient to demonstrate scienter.”  Elsewhere, the court stated that “Avon’s voluntary disclosure of alleged FCPA violations .. weigh against a finding of scienter.”

Another set of plaintiffs’ allegations concerned a whistleblower letter allegedly received by Jung and how this letter allegedly gave rise to a strong inference of scienter that Jung knew of bribery allegations in its China business operations.  However, the court rejected this claim and cited other court decisions standing for the proposition that “defendants are permitted a reasonable amount of time to evaluate potentially negative information and to consider appropriate responses before a duty to disclose arises.”

While the above Avon FCPA-related civil suit was dismissed, not all suits are dismissed.

Recently, in this decision, U.S. District Judge Susan Hickey (W.D. Ark.) adopted a previous magistrate judge’s recommendation denying Wal-Mart and former CEO Michael Duke’s motion to dismiss securities fraud class action claims arising from the company’s FCPA scrutiny.

In pertinent part, the plaintiffs allege that Wal-Mart’s December 2011 FCPA disclosure (see here for prior coverage) deceived the investing public by omitting the fact that Wal-Mart learned of suspected corruption in 2005 and conducted an internal investigation in 2006 (“2005-2006 events”).

According to Plaintiff, the statement was misleading because it could have left investors with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, promptly began an investigation, and then referred the matter to the DOJ and SEC.

The court agreed with the prior magistrate judge’s recommendation that Plaintiff sufficiently alleged that Defendants’ omission from their 2011 statement of the 2005-2006 events renders that statement materially misleading to a reasonable investor. According to the court, the magistrate judge “correctly noted that, without any reference to the 2005 and 2006 events, a reasonable investor could have been left with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, which prompted their investigation and self-reporting to the SEC and DOJ.”

In short, the Court agreed with the magistrate judge “that it is likely that the disclosure of the 2005-2006 events would have been viewed by a reasonable investor as having significantly altered the total mix of information available.”

In the words of the court:

“[The magistrate judge] correctly identified that the issue here is whether Defendant omitted a material fact from the December 2011 statement. She then found that the statement, because of the omission, could have left a reasonable investor with the impression that Defendants first learned of the suspected corruption during fiscal year 2012—an impression that would be untrue. The Court agrees with [the magistrate judge's] conclusion that Plaintiff sufficiently alleges an actionable materially misleading statement.”

As to scienter, the court stated:

“Here, [the magistrate judge] found that Plaintiff sufficiently alleges that when Defendants made the December 2011 statement, they knew certain facts or had access to information suggesting that this statement was not entirely accurate. Plaintiff allege that, in October 2005, a top Wal-Mart attorney gave a detailed description of the suspected corruption allegations to Duke and that Duke rejected calls for a legitimate independent investigation in 2006 and instead assigned the investigation to the very office implicated in the corruption scheme. Plaintiff further alleges that Wal-Mart recognized the materiality of the 2005-2006 events because it reported these events in a June 2012 form.

Plaintiff also alleges that Defendants knew that the omission in the December 2011 statement of the 2005-2006 events was materially misleading. The information that Defendants consciously chose to omit include facts about when and how Defendants first learned of the suspected corruption and how they first responded to these allegations. It was only after the New York Times article was published that Defendants acknowledged that the suspected corruption was the subject of allegations in 2005 and that there were questions about how Defendants handled these allegations in 2005-2006. Plaintiff alleges that this shows that Defendants were concerned about exposure of their alleged mishandling of the suspected corruption. The inference that Defendants intentionally omitted certain information is just as strong, if not stronger, than any competing plausible inference. The Court agrees with [the magistrate judge's] straightforward reasoning and conclusion that Plaintiff sufficiently alleges allegations that both Defendants acted with the requisite scienter.”

Friday Roundup

Friday, August 29th, 2014

Some reading material to keep you occupied and engaged over the three-day holiday weekend.

*****

This recent Wall Street Journal article is about China’s recent antitrust crackdown, but the same could perhaps be said about China’s recent corruption crackdown against foreign multinationals doing business in China.

“The fact that regulators are going after allegedly dubious practices by multinationals isn’t what bothers trade officials at Western embassies in Beijing, even if they suspect that the probes sometimes have the effect of strengthening Chinese state-owned competitors.

What concerns them the most is the heavy-handed way that investigations are being pursued—and highly charged media coverage that makes for a troubling atmosphere for Western companies.

Foreign executives have learned two early lessons from the antitrust probes. First, the law provides little refuge. The message that the National Development and Reform Commission, the government agency that sets pricing rules, delivers in private to multinationals at the outset of a price-fixing investigation is not to bring in their foreign lawyers, according to numerous accounts by foreign executives, diplomats and lawyers themselves.

The second lesson is connected to the first: Resistance is futile. There’s scant need for lawyers when companies face a choice of either bowing to demands for quick remedies or becoming involved in a protracted wrangle with regulators in what is still a state-dominated economy. In almost every antitrust case launched so far, foreign companies have capitulated without a fight.

Voluntary price cuts of up to 20% are the norm, accompanied by board-level expressions of remorse and promises to do better.

And these cuts are offered at the very outset of investigations—and, sometimes, to get ahead of them. Chrysler described its abrupt decision to slash car-part prices as a “proactive response” to the price-fixing probe as it got under way. These price-fixing investigations have been accompanied by heated nationalistic rhetoric in the state media with antiforeign overtones. Taking down multinationals a peg plays well among the large sections of the public that view them as arrogant.”

*****

The always informative Debevoise & Plimption FCPA Update is particularly stellar this month.  It contains articles about the recent Wal-Mart – investor dispute in the Delaware Supreme Court as well as the recent settlement in SEC v. Jackson & Ruehlen.

Wal-Mart Delaware Action

The Wal-Mart Delaware action remains in my mind much to do about little at least as to the monumental corporate governance issues some had hoped for.

Nevertheless, the FCPA Update makes several valid points about the decision.

“In the wake of Wal-Mart, stockholders in future cases are likely to raise questions about the ways in which investigations have been conducted to see whether those questions also provide a “colorable basis” for seeking a broad range of investigative records. Companies that conduct investigations, therefore, will want to structure the investigation from the outset in a way that limits the ability of shareholders to assert that it was done improperly or otherwise may give rise to any legitimate shareholder concern. This, in turn, will place a premium on early decisions about who should conduct the review, who should supervise the review and the scope of the inquiry. Those decisions, which are generally made before any review has been conducted and based upon limited information, are sure to get close scrutiny from stockholders and should be undertaken with the utmost deliberation and care.”

SEC v. Jackson & Ruehlen

This previous post highlighted the recent settlement in SEC v. Jackson & Ruehlen and noted that the SEC, a law enforcement agency with merely a civil burden of proof, was never able to carry its burden and this was among other reasons why the SEC’s case against Jackson and Ruehlen failed – and yes – this is the only reasonable conclusion to be drawn from the settlement.

The FCPA Update states:

“In the realm of FCPA enforcement, where the vast majority of cases are settled before the filing and litigation of formal  charges, it is often hard to compare the outcomes of early and eve-of-trial or post-trial settlements in any meaningful way. The Noble case, however, provides  a rare opportunity to engage in such a comparison, not only because it was litigated by the SEC farther than almost any other FCPA case has been, but also because it involved both pre-and post-litigation settlements for individual defendants based on charges arising out of the same series of events.

In February 2012, the U.S. Securities and Exchange Commission (“SEC”) charged three executives of Noble Corporation with violating various provisions of the FCPA and related laws in the course of their interactions with public officials in Nigeria’s energy sector. One of these defendants, Thomas O’Rourke, promptly settled with the SEC, accepting permanent injunctions against future violations as to every count on which he was charged, and agreeing to pay a $35,000 civil penalty.

The remaining individual defendants, Mark Jackson and James Ruehlen, decided to litigate. On July 2, 2014 – less than a week before trial was to start and after more than two years of litigation – the SEC settled with these two defendants. Although Jackson and Ruehlen agreed to be enjoined from future violations of the books and records provision of the FCPA, the settlements in their matters were notable in that the vast majority of the charges in the initial complaint, including the bribery charges, were conspicuously absent from the settlements, and no monetary penalties were imposed.

Although the Noble case offers just one data point, the outcomes for the three defendants raise important questions about both the difficulties of litigating these types of cases for the SEC and the potential advantages of declining pre-trial settlement for would-be defendants. In addition, the SEC’s litigation strategy in these cases highlights some possible problems with the expansive interpretation of the FCPA that the SEC and the Department of Justice (“DOJ”) have advanced in recent FCPA cases. These problems, highlighted in the District Court’s refusal to accept the SEC’s interpretation on certain key issues, such as the scope of the facilitation payments exception, as well as the concrete impact of the U.S. Supreme Court’s Gabelli decision (133 S. Ct. 1216 (2013)) in gutting large portions of the SEC’s claims for penalty relief, will doubtless affect future litigation, as well as the “market” for SEC (and in certain respects, DOJ) settlements for years to come. But at the same time, the SEC’s losses on these key issues, which drove the favorable settlements with Jackson and Ruehlen, could well incentivize the SEC to dig deeper, and earlier, for the evidence needed to sustain its burdens in FCPA matters.”

*****

The Economist states – in a general article not specific to the FCPA – that “the [U.S.] legal system has become an extortion racket.” According to the article,

“[J]ustice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism.  [...] Perhaps the most destructive part of it all is the secrecy and opacity. The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs.”

In the FCPA context, see here for my 2010 article “The Facade of FCPA Enforcement.

*****

A series of informative posts here, here, here and here from Thomas Fox (FCPA Compliance and Ethics Blog) regarding risk assessment.

*****

A good weekend to all.

This And That

Monday, August 18th, 2014

What Others Are Saying About the “Foreign Official” Cert Petition

From this Law360 article.

Rita Glavin, a partner at Seward & Kissel who previously served as head of the DOJ’s criminal division, called [the cert petition] “tremendously significant.”  “The definition of what constitutes a foreign official has been expanding into the abyss,” Glavin said. “That’s a real problem for companies. Instrumentality pretty much becomes whatever the DOJ says it is.” Glavin compared the expansion of the foreign official provision to that of the “honest services fraud” statute — a provision that served for years as a blunt legal instrument in public corruption cases but was curtailed in the Supreme Court’s 2010 decision in Skilling v. United States. “The government was pushing that statute in cases where people could not have comfort as to where the line was drawn and conduct crossed into criminality,” Glavin said. “The Supreme Court finally put a stop to it.”

Morgan Lewis & Bockius partner George Terwilliger, who served as a top Justice Department official under presidents Ronald Reagan and George H.W. Bush, noted that companies have spent large sums of money policing activities that fall into a legal gray area under the FCPA. He said a ruling on the instrumentality language would provide helpful guidance. “To have a statute of this scope and geographical reach, where some of the key terms remain subject to legitimate debate among legal experts, is unconscionable,” said Terwilliger, who co-chairs Morgan Lewis’ white collar litigation and government investigations practice. “It’s not an appropriate way to administer the law.”

Larry Urgenson, a partner at Mayer Brown, … called [last week's] petition “a useful landmark” for FCPA attorneys. He previously served in several leadership positions at the DOJ, including as acting deputy assistant attorney general and chief of the FCPA unit.  “It is very important in terms of whether the government is properly executing its prosecutorial powers to the right subjects and the right targets,” Urgenson said.

From this Global Investigations Review article:

Steven Michaels at Debevoise & Plimpton in New York said the petition involves issues which the current Supreme Court Justices are potentially keen to examine. “The Justices may find this case attractive, as they would hear arguments about statutory interpretation and whether the standard set forth by the Eleventh Circuit improperly encourage over-reaching by the government,” he said. “The Supreme Court likes to see criminal liability based on precision and clarity, and given the uncertainty in the law governing FCPA enforcement they may be willing to hear this case.” FCPA cases are also rarely litigated, Michaels said. This may encourage the court to grant the petition, as the court may have to wait a long time before the issue is litigated again in a court of appeals. The Supreme Court typically expects to see a split between US appeals courts before it hears a case, but such a split is also unlikely to occur soon.

John Chesley at Gibson Dunn & Crutcher in Washington, DC said the lack of a circuit split is “the main uphill battle” the petitioners will have to fight. ”The lack of clarity in the FCPA’s definition of instrumentality could get the justices interested, especially Justice Antonin Scalia who has written extensively in this area, but the petitioners will nevertheless have a hard time overcoming the court’s preference for only acting when there is a split.” Chesley said the Esquenazi decision was controversial, as the Eleventh Circuit’s complex, multi-factored test for determining whether a company is a government instrumentality makes it difficult to determine whether the recipient of an alleged bribe is a foreign official. “There’s certainly a lot of concern about vagueness,” he said. “For example, one of the factors in the Esquenazi test revolves around whether companies are perceived as government entities in their home jurisdiction. How do you advise a client on that?”

Jessie Liu at Jenner & Block in Washington, DC, said Supreme Court guidance on instrumentality would be “fantastic”, but also said such guidance is unlikely in the near future. ”The Eleventh Circuit’s reasoning was pretty robust,” she said. “We would probably need to see another appeals court go the opposite way for the Supreme Court to get involved, but there’s a good chance the Eleventh Circuit’s reasoning will dissuade future litigants from fighting the issue.”

Wal-Mart’s Pre-Enforcement Action Professional Fees and Expenses

In its August 14th second quarter earnings call, Wal-Mart disclosed:

“FCPA and compliance-related costs were approximately $43 million, which represented approximately $31 million for the ongoing inquires and investigations and roughly $12 million related to our global compliance program and organizational enhancements.”

Doing the math, that is approximately $662,000 in FCPA-related expenses per working day.

Over the past approximate two years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $662,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past three quarters were approximately $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015 (first two quarters) = $96 million.

Scrutiny Alerts and Updates

Layne Christensen Company

Layne Christensen Company has been under FCPA scrutiny since 2010 concerning conduct in Africa (see here for the prior post).  As noted in this November 2013 post, the company disclosed that it was “engaged in discussions with the DOJ and the SEC regarding a potential negotiated resolution” of the matter.

However, last week the company issued this release stating:

“The DOJ has decided to not file any charges against the Company in connection with the previously disclosed investigation into potential violations of the FCPA.  The DOJ has notified Layne that it considers the matter closed.

As previously reported by Layne, in connection with updating its FCPA policy, questions were raised internally in September 2010 about, among other things, the legality of certain payments by Layne to agents and other third parties interacting with government officials in certain countries in Africa.  The audit committee of the board of directors engaged outside counsel to conduct an internal investigation to review these payments with assistance from outside accounting firms.  Layne has been consistent and forthcoming in providing voluntary disclosure to the DOJ and the SEC regarding the results of the investigation, and has cooperated fully with those agencies in connection with their review of the matter.  The parallel investigation by the SEC remains open and the Company is actively engaged in settlement discussions with the SEC to resolve this matter.

Layne had previously accrued a reserve of $10.4 million for the settlement of the investigations. Based on the decision by the DOJ, the Company will reduce the accrual related to this investigation by approximately $5.3 million, which will be reflected in Layne’s results of operations for the second fiscal quarter ended July 31, 2014.

David A.B. Brown, President & CEO, commented, “We are very pleased to conclude the DOJ investigation without any charges being brought against Layne and we hope to settle the SEC investigation in the near future. From the very beginning, we have maintained a position of full disclosure and complete cooperation with the authorities and have worked diligently to implement remedial measures to enhance our internal controls and compliance efforts. Based on conversations with the DOJ, we understand that our voluntary disclosure, cooperation and remediation efforts have been recognized and appreciated by the staff of the DOJ and that the resolution of the investigation reflects these matters.”

Qualcomm

As noted in this previous post, in April 2014 Qualcomm disclosed:

“As previously disclosed, the Company discovered, and as a part of its cooperation with these investigations informed the SEC and the DOJ of, instances in which special hiring consideration, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese state-owned companies or agencies. Based on the facts currently known, the Company believes the aggregate monetary value of the benefits in question to be less than $250,000, excluding employment compensation.

On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies.

[...]

On April 4, 2014, the Company made a Wells submission to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.”

Is this recent New York Times article the reason for Qualcomm’s FCPA scrutiny?  The article states that “an adviser to a Chinese government antitrust committee has been dismissed, accused of accepting payments from Qualcomm, an American technology company under investigation in China on suspicion of antitrust violations.”  According to the article, Qualcomm “had made ‘large payments’ to Zhang Xinzhu, an economist at the Chinese Academy of Social Sciences, while he also was an adviser on an antimonopoly committee under the State Council, China’s cabinet.”  As noted in this Reuters article, Qualcomm said “it had no direct financial links with an antitrust expert sacked from a government advisory post after state media reported he had received payments from the firm.”

Derwick Associates / ProEnergy Services

This August 2013 post predicted FCPA scrutiny for Derwick Associates based on a civil RICO lawsuit filed alleging conduct in Venezuela.

Sure enough.  This recent Wall Street Journal article reports:

“The U.S. Department of Justice and the Manhattan district attorney’s office are probing Derwick Associates … a company awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly after the country’s power grid began to sputter in 2009.  [...]  ProEnergy Services, a Sedalia, Mo.-based engineering, procurement and construction company that sold dozens of turbines to Derwick and helped build the plants, is also under investigation …”.

Cubist Pharmaceuticals

This previous post highlighted the FCPA scrutiny of Optimer Pharmaceuticals.  The company has since been acquired by Cubist Pharmaceutical which recently disclosed as follows.

Optimer U.S. Governmental Investigations

We are continuing to cooperate with the investigations by the SEC and the U.S. Department of Justice in their review of potential violations by Optimer of certain applicable laws, which occurred prior to our acquisition of Optimer. The investigations relate to an attempted share grant by Optimer and certain related matters in 2011, including a potentially improper payment to a research laboratory involving an individual associated with the share grant, that may have violated certain applicable laws, including the Foreign Corrupt Practices Act (FCPA). Optimer had already taken remedial steps in response to its internal investigation of these matters; nonetheless, these events could result in lawsuits being filed against us or Optimer and certain of Optimer’s former employees and directors, or certain of our employees. Such persons could also be the subject of criminal or civil enforcement proceedings and we may be required to indemnify such persons for any costs or losses incurred in connection with such proceedings. We cannot predict the ultimate resolution of these matters, whether we or such persons will be charged with violations of applicable civil or criminal laws, or whether the scope of the investigations will be extended to new issues. We also cannot predict what potential penalties or other remedies, if any, the authorities may seek against us, any of our employees, or any of Optimer’s former employees and directors, or what the collateral consequences may be of any such government actions. We do not have any amounts accrued related to potential penalties or other remedies related to these matters as of June 30, 2014, and cannot estimate a reasonably possible range of loss. In the event any such lawsuit is filed or enforcement proceeding is initiated, we could be subject to a variety of risks and uncertainties that could have material adverse effects on our business, results of operations and financial condition.”

Quotable

Returning to a theme previously explored in the “The Bribery Racket” (Forbes) and “FCPA Inc. and the Business of Bribery” (Wall Street Journal), not to mention my own article “The Facade of FCPA Enforcement,” Robert Amsterdam writes in this Forbes piece titled “When Anti-Corruption Becomes Corrupted,” as follows.

“Like many laws born out of politics, anti-corruption has become alarmingly mired in ambiguity, abuse, and misapplication. In the United Kingdom, the introduction of the Bribery Act, in conjunction with the U.S. Foreign Corrupt Practices Act (FCPA), means that now essentially the globe is covered with a bundle of vague principles and unfettered prosecutorial discretions that leaves multinational businesses dangerously exposed. Not only are the laws vague, but they are accompanied by incredible powers on behalf of prosecutors, who can issue orders to freeze assets, cripple business operations, harass employees, and destroy reputations, all before you’ve even had a chance to defend yourself in court. This ambiguity is heightened by the outsourcing of prosecutorial responsibilities to white collar criminal “defense” lawyers, who have embraced emerging regimes of “self reporting,” placing the onus on corporate decisions to avoid the stigma of criminal charges, requiring them to inform on themselves or their own senior employees, often in the absence of any substance.

[...]

[P]art of the problem is the proliferation of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), which entail the company surrendering its rights to defense and admitting to a series of accusations that are not subjected to exhaustive judicial scrutiny.

[...]

Many big law firms now feature celebrity prosecutors who formerly worked in enforcement, so they see their new job as a continuation of their old job, specializing in negotiating NDAs and DPAs.

In several cases that we are familiar with, the self-reporting doctrine has ended up causing much more damage than benefit. Particularly with respect to non-public companies, a better strategy would be to fight against any untrue or exaggerated accusation, uphold basic rights to defense, take internal measures to address any issues, but above all else, refuse to be bullied into a position of confessing to actions that the company has not committed or destroying the careers and personal lives of a handful of executives to serve as the sacrifice to save the company.

We do fear that if this trend of prosecutorial hubris is not checked, we may face a very dangerous future. The potential consequences of these laws, which include lengthy periods of incarceration, could morph beyond big business and impact other areas of society, where the accused are always guilty, where rights to defense do not exist, and dirty deals replace due process.

The philosophy of self reporting, impacting as it does the lives and reputations of executives in major corporations, requires a dramatic rethink. We must carefully examine the incentives driving prosecutors and how they choose their targets, review sentencing guidelines in both the United States and United Kingdom, and reinforce the core values of the presumption of innocence and due process in order to effectively address genuine issues of corruption practices abroad while sparing compliant businesses from the burden of unnecessary harassment.”

In-House Position

Avon Products, Inc., is looking for an attorney to join the Ethics & Compliance team.

The Regional Legal & Compliance Counsel (RLCC), Latam, reports to the Regional Ethics & Compliance Director for compliance matters and V.P. & General Counsel, Legal, Ethics & Compliance, Latam for legal matters.  The position resides in Miami.  The RLCC plays an active role in the execution of the Global Ethics & Compliance program and provides legal support to the region.  The Company’s Ethics & Compliance program seeks to minimize exposure of corporate and regulatory risks through company guidance and controls.  Working with Legal Department colleagues, especially the legal leadership and Compliance Counsels in the markets and the Regional Compliance Director, the RLCC counsels on compliance-related questions, implementation and execution of policies and procedures, with a particular focus on the anti-corruption policy, as well as assists with the design and implementation of compliance enhancements, as necessary.  The RLCC may spend appreciable time implementing anti-corruption policy controls, such as those concerning third party engagements, gift giving, and donations, thereby facilitating legitimate commercial activities while mitigating risk exposure.

Interested candidates may send their CV directly to Gregory Bates (Director, Ethics & Compliance, Latam) (gregory.bates@avon.com)  and should also apply via the http://www.avoncompany.com/aboutavon/careers/index.html.

Friday Roundup

Friday, August 8th, 2014

Scrutiny alerts and updates, an FCPA fumble, checking in with the SFO, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Cobalt International Energy

Cobalt has been under FCPA scrutiny since 2011 for its alleged business relationships in Angola.  (See here and here for prior posts).

In this recent SEC filing, the company states:

“As previously disclosed, the Company is currently subject to a formal order of investigation issued in 2011 by the SEC related to its operations in Angola.  [...] In connection with such investigation, on the evening of August 4, 2014, the Company received a “Wells Notice” from the Staff of the SEC stating that the Staff has made a preliminary determination to recommend that the SEC institute an enforcement action against the Company, alleging violations of certain federal securities laws. In connection with the contemplated action, the Staff may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the Company the opportunity to provide its reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the Staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding. The Company intends to respond to the Wells Notice in the form of a “Wells Submission” in due course.

The Company has fully cooperated with the SEC in this matter and intends to continue to do so. The Company has conducted an extensive investigation into these allegations and the receipt of the Wells Notice does not change the Company’s belief that its activities in Angola have complied with all laws, including the U.S. Foreign Corrupt Practices Act. The Company is unable to predict the outcome of the SEC’s investigation or any action that the SEC may decide to pursue.”

Rare are so-called Wells Notices in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC.  However, this is the second instance in the past four months of the SEC sending an issuer a Wells notice in connection with an FCPA inquiry. (See here for the prior post regarding Qualcomm).

As highlighted by the below excerpts, the Wells notice was a hot topic during Cobalt’s most recent quarterly earnings call.  The below excerpts also capture the candid statements of Cobalt’s CEO concerning the SEC’s position.

Joseph Bryant - Chairman and Chief Executive Officer

Before we get into the Q&A, let me say a few words about our 8-K disclosure from earlier this morning. As it noted, last evening, less than 24 hours ago, we received a Wells Notice from the Securities and Exchange Commission related to the investigation the agency has been conducting relating to Cobalt’s operations in Angola and the allegations of Angolan government official ownership of Nazaki Oil and Gas, one of the other working interest owners in Blocks 9 and 21 offshore Angola. In the notice, the staff of the SEC stated that it had made a preliminary and, in our view erroneous, determination to recommend that the SEC move forward with an enforcement action against the company. I think it’s important to point out that the Wells Notice is neither a formal allegation nor a finding of wrongdoing. It merely allows Cobalt the opportunity to provide its reasons of law, policy and fact as to why the proposed enforcement action should not be filed before any enforcement decision is made by the SEC. As you know, we have fully cooperated with the SEC and the investigation since it began nearly 3.5 years ago. And we will continue to do so. In the same vein, we will, of course, take this opportunity and respond to the SEC as part of the Wells process. But let me be very clear. This Wells Notice does nothing to change our prior conclusion that our activity in Angola have fully complied with all laws, including the Foreign Corrupt Practices Act, and Cobalt continues to strongly refute any allegation of any wrongdoing.”

[...]

Evan Calio – Morgan Stanley, Research Division

I appreciate your comments on the Wells Notice and underlying FCPA claims. Is there any — can you comment if there’s any potential collateral effect in a negative outcome scenario, meaning other than a potential fine? Could it affect your career or anything in your leases?

Bryant

Well, good question, Evan. We obviously disagree with the staff’s position in the Wells Notice and we’ll respond to the notice in due course. As we’ve stated repeatedly over the past several years, Cobalt has and always will conduct all aspects of our business to the highest ethical standards and in full compliance with all laws and regulations in all jurisdictions, not just Angola, where we operate. This is the case of all of our Angolan operations. We fully plan and expect to pursue the exploration, appraisal and development of all of our Angolan assets, including Cameia development in a timely manner as we’ve previously discussed. And that’s about all I can say, Evan.

Calio

Okay, that’s great. And do you have a hearing date on the Wells Notice? Or is that — just not at this time?

Bryant

No. There’s a process, but to be honest, it’s just like some other things, it can just wander on.

[...]

Joseph Allman - JP Morgan Chase & Co, Research Division

So just back to the Wells Notice for a few minutes, John. Are you planning on taking a reserve? I assume it’s not estimable at this point if there is any fine, so I assume the answer is no. And then just — could you just describe the next steps a little bit? I think you guys have to write a response. If I’m not mistaken, you’ve got about 2 weeks to file that response. Is that correct? Could you just give us some more details on that?

John Wilkerson – Chief Financial Officer, Principal Accounting Officer and Executive Vice President

We are not planning on taking a reserve.

Bryant

And yes, there is a formal process that we respond to. Our view of the facts — and of course, we know the facts incredibly well since we’ve been investigating this for a very long time, and so we will submit our facts to the SEC here in the next several weeks.

[...]

Edward Westlake – Crédit Suisse AG, Research Division

Let’s then get into the Wells Notice as well. So I mean, my understanding, which may be incorrect, of the FCPA is that one aspect of it is doing due diligence, which is the standard of reasonable inquiries, and then the other aspect of it is if some exchange took place in order to get access to the block. It seems from the outside to me that perhaps some disagreements with you and the SEC on how much due diligence was needed could be a civil sort of issue whereas if there was some exchange, that seem to me would be more criminal. So I’m just trying to get a sense of what it is that the SEC, if you know, disagree with you on in terms of their assessment as to why they’d want to go towards an enforcement.

Bryant

Well, the way the process works is it’s somewhat opaque, to be honest with you, on one side, but it’s fully transparent on our side. So we know all the facts, we know them very well. And I’ve said many times that we built Cobalt the right way from day 1 before we ever considered leases in Angola. All of our FCPA, all of our compliance, all of our due diligence systems were built into the company from day 1. I didn’t fall off the turnip truck yesterday and neither did any of these guys around the table. We know all about FCPA and we weren’t about to wander into anything there unknowingly. So all I can say for sure is we know what we’ve done. We know what compliance is required. We’ve gone above and beyond that and we’ll stand firm on our actions.

Westlake

Okay. And all of the due diligence which I’ve done also suggests that your staff has done a very good job in terms of doing their due diligence. But maybe a different way of asking the question, do you think it’s just the level of due diligence which the SEC disagree with you on? Or do you think that there has been some exchange? I understand that Nazaki is a full paying member of the consortium, in fact, was imposed on you rather than something that you chose. But I’m just trying to get some understanding as to what it is you think they disagree with you on.

Bryant

Ed, I appreciate your probing nature, but I really can’t answer that. Again, what I can tell you is, again, we understand the requirements. We understand the law, we understand compliance, we understand due diligence. And we have gone above and beyond in every case. And we sit here today confident in our position, and I cannot and will not speculate on what the SEC’s views are.

Westlake

Okay. And then have there been any inquiries from the DOJ?

Bryant

We have — at every step of the last 3.5 years, we have managed both the SEC and the DOJ simultaneously to make sure that both of those federal agencies are fully up to speed on what we’ve done and what we know about. So I would say constant communication with both agencies has been a routine over the past 3 years.

[...]

Westlake

Right. And maybe just a follow-up on the Wells Notice. Will we ever see the actual SEC letter? Is that a public domain or is it private in terms of their allegations, when eventually they make them.

Bryant

It’s currently private, and we’ll — I hope we’re demonstrating how transparent we are. When we know something, we’ll tell you. And when we have something we can release, we’ll release it. That’s about all really I can say about it.

Westlake

I mean, it would be helpful, I think, for investors to see what the allegation specifics are to be able to make a judgment call but, obviously, I leave that up to you.

Bryant

Got it.

[...]

Al Stanton – RBC Capital Markets, LLC, Research Division

[J]ust back to the Wells notice. Can I ask whether the letters are addressed to the company or do they actually name specific individuals?

Bryant

The company.

Staying with Cobalt-related issues, Global Witness recently issued this press release stating:

“BP and its partners including Houston-based Cobalt have contributed US$175 million over the past two-and-a-half years to fund a project in Angola known as the Sonangol Research and Technology Center (SRTC), with another US$175 million due to be paid by January 2016. Global Witness asked BP and Cobalt to provide any information that confirms the SRTC exists. The companies did not provide this information in their responses. BP stated that Sonangol, Angola’s state-owned oil company, “has informed BP that the SRTC is still in planning stage.” Cobalt said they “monitor the progress of our social contributions in Angola, including the Research and Technology Center” but did not provide any further information about the project. Global Witness asked Sonangol for information to confirm the existence of the SRTC, but the company did not respond. We commissioned interviews with well-placed industry insiders, but none of them could confirm that the SRTC exists.  Global Witness is calling on the Angolan authorities to disclose where this money has gone.”

SBM Offshore

The company has been under FCPA (and related scrutiny) since 2012 concerning allegations primarily in Equatorial Guinea and Angola and disclosed in this press release as follows.

“As previously disclosed in various press releases, SBM Offshore voluntarily reported in April 2012 an internal investigation into potentially improper sales practices involving third parties to the relevant authorities, and has since been in dialogue with these authorities. SBM Offshore is discussing a potential settlement of the issues arising from the investigation. While these discussions are ongoing, it is sufficiently clear that a resolution of the issues will have a financial component, and consequently SBM Offshore has recorded a non-recurring charge of US$240 million in the first half of 2014, reflecting the information currently available to the Company. Until the matter is concluded, SBM Offshore cannot provide further details regarding a possible resolution of the issues arising from the investigation, and no assurance can be given that a settlement will actually be reached. As always, the Company will inform the market as soon as further information can be provided.”

FCPA Fumble

U.S. Senator Roger Wicker (R-MS) is not the first member of Congress to fumble an FCPA issue, just the latest.  As noted in this Radio Free Europe article:

“A U.S. senator has asked federal authorities to investigate whether a powerful Russian media mogul seen as the mastermind behind the Kremlin-funded RT network used dirty money to purchase pricey California real estate.   U.S. Senator Roger Wicker (Republican-Mississippi) has asked the Justice Department to investigate whether Mikhail Lesin, Russian President Vladimir Putin’s former press minister, violated the Foreign Corrupt Practices Act or laundered money by acquiring multimillion-dollar homes in the Los Angeles area.”  [See here for Senator Wicker’s letter to the DOJ].

Dear Senator Wicker, alleged “foreign officials” are not subject to the FCPA.  See U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991).

Checking In With the SFO

The U.K. Serious Fraud Office recently announced the following sentences of individuals in connection with the Innospec prosecution.

Dennis Kerrison, 69, of Chertsey, Surrey, was sentenced to 4 years in prison. Paul Jennings, 57, of Neston, Cheshire, was sentenced to 2 years in prison. Miltiades Papachristos, 51 of Thessaloniki, Greece, was sentenced to 18 months in prison. David Turner, 59, of Newmarket, Suffolk, was sentenced to a 16 month suspended sentence with 300 hours unpaid work

Mr Kerrison and Dr Papachristos were convicted of conspiracy to commit corruption in June 2014 in relation to Indonesia only. Mr Jennings pleaded guilty in June 2012 to two charges of conspiracy to commit corruption and in July 2012 to a further charge of conspiracy to commit corruption in relation to Indonesia and Iraq. Dr Turner pleaded guilty to three charges of conspiracy to commit corruption in January 2012 in relation to Indonesia and Iraq.

Further information on the guilty verdict delivered in the trial of Mr Kerrison and Dr Papachristos can be found here, while information on the guilty pleas entered into by Dr Turner and Mr Jennings can be found here and here.

Upon sentencing the defendants, HHJ Goymer said:

“Corruption in this company was endemic, institutionalised and ingrained… but despite being a separate legal entity it is not an automated machine; decisions are made by human minds.

“None of these defendants would consider themselves in the same category as common criminals who commit crimes of dishonesty or violence….. but the real harm lies in the effect on public life, the effect on community and in particular with this corruption, its effect on the environment.  If a company registered or based in the UK engages in bribery of foreign officials it tarnishes the reputation of this country in the international arena.”

Concerning the sentencing of Dr Turner, the Judge also said:

“It is necessary to give encouragement to those involved in serious crime to cooperate with authorities.  You [Dr Turner] very narrowly indeed escaped going to prison.”

David Green CB QC, Director of the SFO said:

“This successful conclusion to a long-running investigation demonstrates the SFO’s ability and determination to bring corporate criminals to justice.”

Innospec itself pleaded guilty in March 2010 to bribing state officials in Indonesia and was fined $12.7 million in England with additional penalties being imposed in the USA.

Dr Turner was also ordered to pay £10,000 towards prosecution costs and Mr Jennings was ordered to pay £5000 towards these costs.  Dr Turner and Mr Jennings have already been subject to disgorgement of benefit by the US Securities and Exchange Commission.  The matter of costs for Mr Kerrison and Dr Papachristos has been adjourned pending the hearing of confiscation proceedings against them.”

For more on the sentences, see here from thebriberyact.com.

Reading Stack

Professor Stephen Bainbridge knows Delaware corporate law and related corporate governance issues as well as anyone.  In regards to the Wal-Mart Delaware action (see here for the prior post noting that despite the hype, the decision was much to do about little), Professor Bainbridge writes:

“There’s been a fair bit of blawgosphere chatter about [the Wal-Mart Delaware action].”  [...]  Personally, it just doesn’t seem that big a deal. Somebody want to explain to me why I should care more?”

Spot-on.

*****

Sometimes a suitable proxy for potential red flags may be whether, upon reading a certain set of facts and circumstances, one becomes dizzy.  This recent New York Times article regarding former U.K. Prime Minister Tony Blair may make you dizzy.

*****

A good weekend to all.

Wal-Mart Delaware Action – Much To Do About Little

Monday, July 28th, 2014

There are certain topics in the FCPA space that are over-hyped.

The document request dispute in connection with a Wal-Mart derivative action is certainly one example.

By way of background, in the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against the company and various current or former officers and directors alleging, among other things, breach of fiduciary duties.  Derivative actions are subject to specific pleading rules and in connection with its filed complaint the Indiana Electrical Workers Pension Trust Fund (“Plaintiff”) made certain demands on Wal-Mart under Section 220 of the Delaware General Corporation Law.  Titled ”Inspection of Books and Records,,” Section 220 governs a stockholder’s right to inspect certain corporate books and records.

In response to Plaintiff’s Section 220 Demand, Wal-Mart agreed to make certain documents available, but declined to provide documents that it determined were not necessary and essential to the stated purposes in the Demand or that were protected by the attorney-client privilege or work-product doctrine.  To resolve the disputed document request issues, the Delaware Court of Chancery (a trial court) ordered Wal-Mart to produce certain additional documents.

Wal-Mart disagreed with the Court of Chancery’s order and filed an appeal with the Delaware Supreme Court arguing that the trial court erred in ordering Wal-Mart to produce documents that far exceeded the proper scope of Section 220 requests.

Despite the rather pedestrian nature of the document request dispute, some saw (or perhaps were hoping to see) monumental issues.

This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?

“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”

As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.

Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”

As highlighted below, this did not happen either.

Hype aside, as framed by the Delaware Supreme Court in its decision, ”the sole issue presented for judicial determination was whether Wal-Mart produced all of the documents that were responsive to [Plaintiff's] Demand.”  Under the “necessary and essential” test applicable to Section 220 proceedings, and reviewing the Court of Chancery’s order under the abuse of discretion standard, the Supreme Court determined that all issues on appeal (both issues raised by Wal-Mart as well as Plaintiffs) were without merit and therefore affirmed the Court of Chancery order.

Specifically, as to the Plaintiff’s demand for officer-level documents, the court concluded that “officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted to Wal-Mart’s directors and officers.”

In its decision, the Supreme Court also addressed certain pedestrian issues such as the relevant dates of production, disaster recovery tapes for two document custodians, and the precision and specificity of certain document requests.

The Delaware Supreme Court also addressed an issue on appeal not presented to the Court of Chancery concerning the so-called Garner doctrine (a fiduciary exception to the attorney-client privilege in which stockholders are allowed to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause).

In its decision, the Supreme Court acknowledged its previous dicta statements in which it endorsed the Garner doctrine in a Section 220 proceeding and agreed with previous Court of Chancery decisions applying the Garner doctrine in a Section 220 proceeding.

Applying the Garner doctrine to the Plaintiffs’ Section 220 demand, the Supreme Court agreed with the Court of Chancery that the Plaintiffs established good cause to order the privileged documents be produced because the Plaintiffs “had demonstrated a colorable claim against Wal-Mart” and that the information sought was not available via other means.  In short, the Supreme Court stated:

“The record supports the Court of Chancery’s conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.”

The Supreme Court further found that the Court of Chancery properly ruled that Plaintiffs’ demands for certain work-product documents were legitimate under a relevant Court of Chancery rule because the relevant Garner factors overlapped with the required showings necessary under the rule.

In short, the issues presented to the Delaware Supreme Court, and the Court’s decision, merely concerned document issues relevant to pre-trial pleading requirements in a derivative action – hardly the momentous issues some had reported or predicted.

Moreover, although the Delaware Supreme Court appeal was viewed as Wal-Mart’s appeal, as a matter of fact, the Plaintiff also filed cross-appeals which the Supreme Court also deemed to be without merit.  The Supreme Court denied the Plaintiffs request that Wal-Mart should collect documents from additional custodians and also denied the Plaintiffs’ challenge to the Court of Chancery’s order requiring it to return to Wal-Mart certain privileged documents that were delivered to its counsel by an anonymous source.

For oral argument of the Delaware Supreme Court hearing, see here.